Note to Readers: More details to come; changes are highlighted. Except where noted, and highlighted, no other section of this report has been updated
Reason for Report: Flash Update: 1Q13 Earnings
Prev. Ed.: Mar 20, 2013: 4Q12 and FY12 Earnings (brokers’ material till Mar 15)
Note: The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Flash Update
Conceptus Earnings Beat; Merger Announced – Apr 29, 2013
Conceptus reported earnings per share (EPS) of $0.05 in 1Q13, a massive improvement from the net loss of $0.09 per share in 1Q12. The reported EPS betters the Zacks Consensus Estimate of a loss of $0.02.
Quarter in Detail
Revenues in 1Q13 recorded a robust hike of 17.5% y/y to $34.1 million, beating the Zacks Consensus Estimate of $32 million. This includes a 21.7% jump in domestic sales to $26.5 million and growth of 5% in international sales to $7.6 million.
Even amid several macroeconomic headwinds in the form of persistent unemployment and limited consumer spending, the improvement in 1Q13 primarily came on the back of a 17.6% increase in organic revenues and the exit of the company’s direct peer Hologic’s Adiana from the permanent birth control market. The conversion of Adiana’s market share added 4.6% to the company’s growth in 1Q13. Moreover, Conceptus’ gradual progress in improving commercial execution is steadily accelerating its growth rate.
Conceptus derives a major share of its revenues from the Essure permanent birth control system. The domestic sales for Essure during 1Q13 were up 22.2% y/y.
Sales of the Essure system depends on the number of physicians trained to perform the procedure. Conceptus is striving toward making the system available worldwide by raising consumer and physician awareness as well as training physicians to perform the procedure.
During 1Q13, the company improved its U.S. physician penetration by enrolling 341 new physicians into preceptorship, certifying approximately 83 physicians and transitioning approximately 47 physicians for procedures performed in the office setting. To date, around 16,300 physicians are fully equipped to perform the Essure procedure.
Conceptus reported gross profit of $28.5 million, up 19.3% from 1Q12. As a result, gross margin during 1Q13 expanded 120 basis points (bps) to 83.4%.
Operating expenses declined 11.8% to $24.4 million, driven by the company's lower marketing expenditures related to the direct-to-consumer campaign. Consequently, operating income came in at $4 million compared with $3.9 million loss incurred in 1Q12.
Conceptus exited 1Q13 with cash, cash equivalents and short-term investments of $87 million compared with $69.9 million at the end of FY12.
Bayer to Takeover Conceptus
In a separate story, Conceptus inked a definitive merger agreement with German-based Bayer HealthCare. Bayer will initiate a public tender offer to acquire all shares of the Conceptus common stock within the next ten days.
Based on a purchase price of $31 per share, Bayer will pay $1.1 billion for the acquisition. Conceptus pulled back its guidance for FY13 as the acquisition is expected to close by mid-FY13.
Details, other news update and broker comments will be provided in the next edition.
Portfolio Manager Executive Summary
Conceptus Inc. (CPTS) designs and develops minimally invasive devices for reproductive medical applications, including its Essure device, which is a non-surgical permanent contraception device for women.
Of the 9 firms covering the stock, 6 (66.7%) were positive and 3 (33.3%) rendered neutral ratings to the stock. None of the firms provided a negative rating.
Positive or equivalent outlook (6/9) – These firms are encouraged by the 4Q12 results which beat their expectations. Further, they are encouraged by the FY13 outlook which implies augmented growth in the coming quarters. The firms are of the opinion that following the exit of Hologic’s Adiana from the permanent birth control market, Essure has emerged as the only hysteroscopic permanent birth control solution in the market. They assert that Conceptus can gain additional market share in the future with further conversion of the Adiana market. They also believe that the absence of any near-term competition in its primary market should result in a sustainable growth trend in the years ahead. These firms are upbeat about the retraction of the reimbursement restrictions in France for permanent contraception with Essure for women under 40. These firms also derive comfort from improved utilization and higher reimbursement level in UK. They believe that this will improve sales in the offshore market, especially in the light of the difficult macroeconomic situation in Europe. Further, robust sales to its Spanish distributor represent another potential upside for FY13. According to the bullish firms, Conceptus’ strategic decision to move its production facility is likely to improve margins going forward. Moreover, these firms are optimistic about Conceptus’ pipeline development, especially about the ongoing clinical trial in Europe for the next generation Essure. With earlier-than-expected start of the trial, they are looking forward to the results of the clinical study. Positive clinical result is likely to further boost the confidence of these firms regarding Conceptus’ leadership in the non-surgical contraception space for women. These firms believe that the commercialization of the company’s next generation device is essential to sustain growth over the long haul. They are encouraged by Conceptus’ plans to move aggressively into the low-resource market in order to expand access to Essure, drive incremental volumes among existing customers and open new accounts They expect that the major obstetrics and gynecology (OB/GYN) medical societies will make transcervical sterilization the standard of care over the next few months and thus expect Conceptus to increase its revenue going ahead. Given this backdrop, the firms expect the company to surpass its top-line outlook for FY13. They also consider Conceptus to be well poised to post double-digit growth in the years ahead.
Neutral or equivalent outlook (3/9) – Despite solid 4Q12 results, these firms maintain a neutral disposition as they believe that Conceptus’ FY13 outlook implies a slowdown in core growth. Although, the Adiana market capture continues to be a material upside for the company, these firms are cautious as they believe that market share recapture will be difficult, as the hysteroscopic sterilization market growth has been decelerating. On the tepid side, these firms are wary that the lower margin European operations might drag the overall operating margin of Conceptus, which in turn might adversely affect bottom line. According to these neutral firms, currency headwinds also remain an overhang. Additionally, utilization headwinds remain in the domestic as well as international market. In the end, these firms prefer to remain on the sidelines.
Mar 20, 2013
Overview
Conceptus Inc. (CPTS) manufactures and markets the Essure permanent birth control system, a device/procedure designed to provide a non-incisional alternative to tubal ligation, which is currently the leading form of birth control worldwide. On Apr 30, 2012, the company’s then peer – Hologic agreed to withdraw its Adiana system from the market (by May 18, 2012) based on the settlement of the patent infringement litigation. Following Adiana’s exit, Conceptus’ Essure continues to gain considerable market share. To date, about 730,000 women across the globe have undergone the Essure procedure. The company is headquartered in Mountain View, Calif. Further information on the company can be found at its website: www.conceptus.com.
Brokerage firms identified the following factors for evaluating the investment merits of Conceptus:
Key Positive Arguments / Key Negative Arguments· Conceptus has a best-in-class product that sets up significant barriers to entry. Moreover the company is improving its physician metrics to grow its customer base.
· With the exit of Hologic’s Adiana from the permanent birth control market, Conceptus has a monopoly in the transcervical sterilization market leading to competitive share gain.
· The reimbursement coverage increase in UK is gradually working favorably for Conceptus. The turnabout of reimbursement decision in France is likely to catalyze growth in the future. / · Economic uncertainty is delaying physician office visits, negatively impacting the number of procedures performed.
· International revenue is still in a challenging state because of economic uncertainties in Europe.
NOTE: The company’s fiscal references coincide with the calendar year.
Mar 20, 2013
Long-Term Growth
Although Conceptus claims a steady improvement in physician office visits, looking ahead, the firms believe that Conceptus OB/GYN office visit trends remained mixed during the past few months due to macroeconomic pressure. Also, Essure procedure is elective in nature, which means that it will often get delayed in current environment of economic uncertainty and high unemployment.
However with Adiana’s exit from the market, Conceptus will have the only hysteroscopic permanent birth control solution in the market. The firms considered this to be an important factor favoring Conceptus as the procedure is much less invasive than other surgical solutions such as tubal ligation or male vasectomy. They also believe that while Hologic is still free to develop another permanent sterilization product, it has to be distinct from Adiana, which may take several years until commercialization.
Management is gradually achieving its goal of improving physician metrics through increased recruitment and training efforts as well as in-office adoption. The firms continue to view the office setting as a key growth driver for Essure in the marketplace, as this setting provides superior economics for both physicians and their patients. In addition to lower upfront cost to the patient; women prefer the comfort of the office setting, less-invasive nature of the Essure procedure, and the minimal anesthesia required by the procedure relative to the traditional approaches. Also, the minimally invasive procedure will help Essure to capture the market gradually.
In FY11, the U.S. Department of Health and Human Services (HHS) concluded that permanent birth control will be covered under the PPACA. In Jun 2012, The Supreme Court verdict to uphold the PPACA provided the much needed impetus to Conceptus’ business. As per the act, the entire list of contraceptive methods approved by the US Food and Drug Administration (FDA), including the Essure procedure, will be covered by all private insurance plans. According to the firms, this order effective Aug 2012 is a landmark development for women's health care and will benefit the sales performance of Conceptus. It will work by reducing cost burden and increasing access and affordability of the Essure procedure worldwide in the coming years.
Mar 20, 2013
Target Price/Valuation
Rating DistributionPositive / 66.7%
Neutral / 33.3%
Negative / 0.00%
Avg. Target Price / $23.20↑
Maximum Target / $26.00↑
Minimum Target / $19.00
No. of Analysts with Target price/Total Analyst / 9/9
Downside from current / 0.3%
Maximum Upside from current / 11.8%
Minimum downside from current / 18.3%
The primary risk to target price and valuation includes competition from previously approved therapies. Other risks include reimbursement issues, regulatory approval and product liability, and patent infringement risks.
Recent Events
On Feb 5, 2013, Conceptus reported its 4Q12 and FY12 results. Highlights are as follows:
Ø The company reported EPS of $0.17 in 4Q12, compared with a loss of $0.08 per share in 4Q11. In FY12, EPS was $0.16 compared with a net loss of $0.25 per share in FY11.
Ø Revenue shot up 21.5% y/y to $40.7 million in 4Q12. Net sales in FY12 were $140.7 million, up 10.8% y/y.
Ø Conceptus provided FY13 outlook. The company expects annual revenues in the range of $155–$159 million, up 10%–13% y/y.
Revenue
Conceptus derives a major share of its revenue from Essure. Essure is approved for sale in many countries, including the U.S., European nations, Australia, Canada, Mexico, Central and South America, and New Zealand.
Revenue in 4Q12 was up 21.5% y/y (up 23.6% at constant exchange rate or CER) to $40.7 million. Net sales in FY12 were $140.7 million, up 10.8% y/y (up 10.8% at CER). Revenues remained in line with the company’s guided range of $140–$144 million in FY12. Excluding the impact of 2011 ThermaChoice co-promotion commissions, 4Q12 and FY12 growth at CER were 23.6% and 13.5%, respectively. Conceptus shipped more than 34,400 units in 4Q12.
Growth in 4Q12 revenue includes a 19.3% increase in domestic sales to $32.2 million. Domestic revenue was led by higher procedure volume and successful recapture of Adiana market share for Conceptus’ Essure. Growth in the U.S. was also aided by sustained stability in OB/GYN physician office visits, higher awareness in target population and optimizing sales activities. Of the 34,400 units shipped in 4Q12, 67% were shipped in the U.S. in 4Q12. Average selling price (ASP) in U.S. came in more than $1,350 in 4Q12.
In 4Q12, domestic Essure sales increased 20.6% y/y, a record high for Conceptus. This reflects organic growth of 13.5% and 7.1% sales pick up after Adiana exited the market.
Even amid several macroeconomic headwinds in the form of persistent unemployment and limited consumer spending, the improvement in 4Q12 primarily came on the back of a 13.5% increase in organic revenues and the exit of the company’s direct peer Hologic’s Adiana from the permanent birth control market. The conversion of Adiana’s market share added 7.1% to the company’s growth in 4Q12. Moreover, Conceptus’ gradual progress in improving commercial execution is steadily accelerating its growth rate.
International sales surged 30.8% y/y to $8.5 million in 4Q12. Overseas revenue exceeded the company’s expectation due to solid unit volume growth of 13.4%. It was mainly led by orders from its Spanish distributor in 4Q12 versus no orders in 4Q11. Conceptus recorded double-digit growth in France, UK, Finland, Italy and Portugal. However, this was partially offset by softness in Holland and foreign exchange headwinds. Of the total shipments in 4Q12, the remaining balance 33% were shipped overseas. International ASP in 4Q12 was down 10% y/y due to unfavorable currency and channel mix between direct and distributor markets, mainly in Spain.